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The hammer is another candle pattern that many traders rely on. It is supposed to act as a bullish reversal and testing reveals that it does 60% of the time, placing the reversal rank
at 26. That is quite respectable. Once price reverses, though, it does not travel far based on the overall performance rank of 65 where 1 is best out of 103 candle types.

Hammer Discussion

The hammer is a single line candle that appears in a downward price trend and it signals a reversal 60% of the time. That's not bad, but it's also not far from random (50%). Once
the candlestick appears and price breaks out, the move is unexciting, ranking 65 out of 103 candles where 1 is best. But the hammer appears frequently, so if you blow one trade you can
try again to compound the loss.

If you project the height of the candle in the direction of the breakout (candle top for upward breakouts and candle bottom for downward ones), price meets the target 88% of the time,
which is very good. The best average move occurs after a downward breakout in a bear market. Price drops an average of 4.12% after a hammer, placing the rank at 48 where 1 is best.
That, of course, is just mid range out of the 103 candle types studied. A good performance would be a move of 6% or more.

Hammer Identification Guidelines

Characteristic

Discussion

Number of candle lines

One.

Price trend leading to the pattern

Downward.

Configuration

Look for the hammer to appear in a downward price trend and have a long lower shadow at least two or three times the height of the body with little
or no upper shadow.

Three Trading Tidbits for Hammers

Hammer candles that appear within a third of the yearly low perform best -- page 351.

Hammers within a third of the yearly high frequently act as reversals -- page 353.

Trade white bodied hammers for the best performance -- page 353.

Hammer Example

The chart shows a hammer candlestick on the daily scale at point A. After two weeks of trending lower, the stock reaches a support level and a hammer
appears.

The small body with long lower shadow and no upper shadow qualifies the candle as a hammer. Price bounces off support and closes above the top of the hammer the next day, staging an upward
breakout and forming a doji. The doji speaks of indecision and the following day, price opens lower but closes higher forming a tall white candle in the process. A day later, price gaps upward
in a burst of enthusiasm but cannot hold it. Price collapses in the days that followed, returning it back to the support area where the hammer appears.

If the hammer's body color was white, it would also qualify as a bullish harami since the hammer snuggles inside the body of the prior candle.